In Pensco Trust Co. v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), the U.S. Court of Appeals for the Ninth Circuit held that a creditors claim, based upon a debtor’s failure to pay an arbitration award, must be subordinated pursuant to section 510 (b) of the Bankruptcy Code. In Tristar, Jane O'Donnell purchased a minority membership interest in Tristar, a limited liability company, and exercised her right to withdraw her membership interest. Subsequently, debtor filed a chapter 11 bankruptcy petition and commenced an adversary proceeding against O'Donnell seeking to subordinate her claims under section 510 (b) of the Bankruptcy Code. O'Donnell insisted that section 510 (b) of the Bankruptcy Code did not apply because the claim was “not for damages, but for a fixed, admitted debt.” Additionally, O'Donnell claimed that section 510 (b) should not apply because the claim “does not arise from the purchase or sale of securities” because she converted her equity interest to a debt claim before debtor filed its bankruptcy petition. The bankruptcy court rejected O'Donnell’s arguments and held that the subordination clause of section 510 (b) “sweeps broadly.” Consequently, the bankruptcy court “broadly interpreted” the phrase “arises from” to mandate subordination whenever there is a “causal relationship between the claim and the purchase” or sale of securities. Furthermore, although O'Donnell did not “enjoy the benefits of equity ownership on the date of the petition,” according to the bankruptcy court, since O'Donnell bargained for an equity position she therefore, “embraced the risks that position entails.” On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit[xiii] and the United States Court of Appeals for the Ninth Circuit both affirmed.

In In re Bayou Shores SNF, LLC, a district court found that a bankruptcy court lacked subject matter jurisdiction to thwart the regulation of Medicare and Medicaid funds of a non-compliant debtor. In particular, the district court, siding with the majority view, determined that 42 U.S.C. 405(h) bars bankruptcy courts from interfering with decisions made by the Centers for Medicare and Medicaid Services (“CMS”) relating to Medicare and Medicaid.

In In re Northshore Mainland Services, Inc. , the Bankruptcy Court for the District of Delaware dismissed Bahamian companies’ chapter 11 cases, relating to the construction of the Baha Mar Resort, under the abstention provision of the United States Bankruptcy Code (the “Code”), and refrained from dismissal of the Delaware companies’ chapter 11 case.[1] Construction of the Baha Mar Resort, which included four new hotels, a Las Vegas style casino, and a premier Jack Nicklaus Signature 18-hole golf course, broke ground in February 2011 with completion estimated by November 20, 2014.[2] By 2013 it was clear that the contractors were not going to meet the planned schedule.[3] Almost two years later, the Baha Mar Resort remained incomplete.[4] Subsequently, the debtors filed chapter 11 petitions under the Code with the Delaware bankruptcy court.[5] In addition, the debtors requested recognition of the chapter 11 cases in the Bahamas.[6] The Bahamian Attorney General opposed the debtors’ request for recognition and asked the Bahamian court to issue an order winding up of all the Bahamian debtors’ business.[7] The Bahamian court concluded that subordinating the local proceedings to the Delaware proceedings where the locale had little connection to the debtors would not be equitable.[8] The Bahamian Court thereafter dismissed the winding up proceedings for certain debtors and appointed joint provisional liquidators to seven others.[9] In the meantime, two of the debtors filed motions in the bankruptcy court to dismiss their chapter 11 cases.[10] According to the debtors, the best interests of the debtors and creditors would be served by dismissal of the chapter 11 cases and the continuation of proceedings in the Bahamas.[11] Ultimately, the United States bankruptcy court dismissed the cases of the Bahamian debtors under Section 305(a) of the Code.[12] The bankruptcy court, however, refused to dismiss the chapter 11 case filed by Northshore Mainland Services, Inc., a Delaware corporation.[13]

In general, a debtor may, subject to court approval, retain and pay professionals, including attorneys, under section 327 of the chapter 11 Bankruptcy Code. It is unclear, however, who is responsible for paying a professional retained by a debtor’s professional. The United States Bankruptcy Court for the District of Idaho held in a chapter 11 bankruptcy case that a court-approved accountant can be statutorily barred from recovering legal fees from the debtor. Debtor, Walker Land & Cattle, L.L.C., filed for chapter 11 bankruptcy and requested permission to use cash collateral. Upon the request of Creditor, Wells Fargo Bank, the court required the debtor to provide audited financial statements. The court approved the employment of accountant Judith K. Bower (“Bower”) to conduct the audit. Bower conducted the audit within five months. After the audit, the creditor issued a notice to depose Bower. The creditor subsequently issued a subpoena for Bower to testify at the debtor’s confirmation hearing. Bower retained counsel for both the deposition and hearing. Bower subsequently sought $7,735 for reimbursement of her attorney’s fees from the debtor. The court denied the request, finding that Bower did not prove the legal fees were necessary expenses under section 330 of the Bankruptcy Code. Therefore, Bower could not recover such fees as reimbursement expenses.

The culmination of a chapter 11 case is typically a plan that provides for payment to creditors in accordance with the priority scheme in Section 507 of the United States Bankruptcy Code (“Code”).[1] In In re Jevic Holding Corp. , the Third Circuit held that in certain rare circumstances, bankruptcy courts have the discretion to approve structured dismissals, which do not comply with Section 507 of the Code.[2] A structured dismissal is a settlement proposed to the court that provides for the distribution of the debtor’s assets to creditors.[3] In In re Jevic , the debtor proposed a structured dismissal after reaching a consensus with a majority of its creditors.[4] The Jevic truck drivers (“Drivers”), former employees of Jevic with a Worker Adjustment and Retraining Notification (“WARN”) claim,[5] however, did not agree to the settlement.[6] In opposing bankruptcy court approval of the settlement and the structured dismissal, the Drivers argued that (1) the Code does not allow for structured dismissals and (2) the settlement paid the creditors with claims junior to the Drivers’ WARN claims and therefore violated the priority scheme established under Section 507.[7] Bankruptcy settlements generally follow the absolute priority rule, which requires that creditors be paid in the order of their priority under Section 507.[8] The bankruptcy court overruled the Drivers’ objection and approved the settlement providing for the dismissal of the debtor’s chapter 11 case upon payment of certain administrative and tax expenses which were lower in priority than the Drivers’ claims.[9] On appeal, the district court affirmed the bankruptcy court’s decision.[10] The Drivers appealed again, and the Court of Appeals for the Third Circuit also affirmed.[11]